Questions abound about Cohen's SAC realm

Published 8:14 am, Wednesday, December 26, 2012

You want the headquarters of Steven A. Cohen, one of the most successful financial speculators of our time, to look like Dr. Evil's secret lair. But it is just another office-park building, a low-slung affair of tinted glass and red brick, on the southern fringes of Stamford.

From the outside, there's nothing particularly special about this address, 72 Cummings Point Road. But inside -- well, everyone on Wall Street has heard the stories.

Some of them are even true.

We are, after all, talking about the man known on the Street as "Stevie" -- hedge fund magnate, multibillionaire, prodigious art collector and, of late, person of intense interest to federal authorities.

Inside his offices, vast fortunes are won and lost. Careers are made and unmade. Type-A egos are inflated and crushed, sometimes in the space of hours. And there, Cohen, a trader with an almost preternatural knack for reading fear and greed in the marketplace, prowls relentlessly for an edge over everyone else.

Cohen, 56, today sits at the center of more concentric circles of money and power and worry and suspicion than perhaps anyone else in the hedge fund game. Neither he nor the private investment firm that bears his initials, SAC Capital Advisors, has been accused of wrongdoing. But over the past half-decade, as a vast federal investigation into insider trading has unfolded in stunning detail, the questions have returned again and again. In soft-carpeted executive suites, on fervid trading floors, in Park Avenue co-ops and on Connecticut back lanes, the same subject keeps coming up: Just what is going on inside 72 Cummings Point Road?

It is, perhaps, understandable. On Wall Street, Cohen is envied and feared in equal measure. Hedge fund managers like him have helped redefine what it means to be rich, even if most ordinary people don't quite understand what they do or how they do it.

For years, the investigations had swirled around SAC, but that was about all. Then, on the afternoon of Nov. 28, the word went out across Wall Street: The Securities and Exchange Commission was warning that it might go after SAC, too. Elsewhere in the investigations, prosecutors have turned up damning evidence through FBI wiretaps and reached into the boardrooms of some of the mightiest corporations. Seventy-one people have been convicted in a sweep that dwarfs the 1980s-era Wall Street scandals involving Ivan Boesky and Michael Milken.

But there is also this undeniable fact: The government inquiry has linked six former SAC employees to insider trading while at the fund; three have pleaded guilty. On Friday, a grand jury indicted Mathew Martoma, a former employee who was arrested last month on charges that he used insidetips abouta clinical drug trial to help SACearn profits and avoid losses totaling$276 million. (A lawyer for Martoma says his client is innocent.) In the Martoma case, prosecutors for the first time have tied Cohen to questionable trades.

The first rumbles of wrongdoing came in 2003, when a trader at SAC came under scrutiny from the SEC for possible insider trading violations. Regulators wanted to know if he had been given early access to Wall Street research reports. He was never charged.

Two more blows came in 2006, when two separate companies -- the pharmaceuticals concern Biovail and Fairfax Financial, a Canadian insurance company -- filed lawsuits against SAC and other hedge funds, essentially accusing them of spreading lies in order to profit from a decline in their share prices. The Biovail case was featured on a "60 Minutes" report, which cast the company as the victim and the hedge funds as predators. Both lawsuits were dismissed, and Biovail, in 2011, paid $10 million to SAC and issued an apology. But not even Cohen could dodge the financial crisis. On one particularly dark day in 2008, one SAC trader recalls, Cohen said: "I lost a billion dollars today. And probably $250 million in art."

It turned out to be SAC's worst year ever, the only year it lost money. Its flagship fund plummeted 19 percent in value. Cohen personally lost $750 million, according to Alpha magazine.

Former employees say Cohen was furious about the big paychecks he awarded the previous year. He immediately began cutting expenses. SAC dismissed roughly a third of its money managers. For those who stayed, there were no more monthly birthday cakes.

But as much as anything else, Cohen is now grappling with the confluence of powerful forces. The proliferation of hedge funds over the past decade has made spotting winning trades much more difficult. Many funds simply crowd into the same investments, reducing the potential payoff for everyone.

On top of that, changing rules, particularly one barring corporate executives and research analysts from disclosing information to select investors, have dulled SAC's edge in information. SAC and others have increasingly leaned on so-called expert networks, which match industry specialists with financial players hungry for information. SAC, for instance, was a top client of the Gerson Lehrman Group, a top expert network firm.

Then, of course, there are all those investigations. In one case, a former SAC fund manager who pleaded guilty told investigations that he thoughttrafficking in corporate secrets was part of this job description.In another case, the government says Martoma had a 20-minute phone conversation with Cohen the day before SAC dumped $700 million in twopharmaceutical companies andproceeded to make a big betagainst them. Prosecutors said Martoma had secret information about the companies' drug trials from a doctor.

In sworn testimony with an SEC lawyer last summer, Cohen said he sold the stocks after the analyst told him that he had lost conviction about the investments, according to a person briefed on the case. Cohen said he could recall little else. In late November, amid all the headlines, the SEC warned that it might file a civil fraud lawsuit against SAC related to the Martoma case.

Cohen has made a lot of people unimaginably rich, including himself. One question today is whether his investors -- who have profited handsomely from his trading prowess over the years -- will stand by him now.

He has had a solid year, up 12 percent through November. Yet private bankers at Citigroup have advised clients not to invest more money with SAC. Investors who want to pull their money at their first chance, next March, have until Feb. 15 to advise SAC of their intentions. Inside 72 Cummings Point Road, the troops are worried. SAC employees have begun working the phones on weekends, exploring other job opportunities, says the chief executive of a bank that does business with Cohen's firm.

As for Steve Cohen, he could walk away tomorrow, return every dime to his investors. And, barring the worst, he would be left, in quiet splendor, to trade with a fortune few can even fathom.